Home Depot (HD) is the largest home improvement retailer in the US, and it is credited with having revolutionized the American home improvement industry. It reported a revenue of $151.157 billion and net earnings of 16.433 billion in the 2021 fiscal year.
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Home Depot Strengths 2022
According to Home Depot’s 2021 Annual Report, it currently has 2006 stores across the US, occupying more than 240.5 million square footage. HD stores are 10 miles away from 90 per cent of the US population.
Diversified revenue source:
According to Home Depot’s 2021 Annual Report, all of their merchandising department net sales are below 10 percent (Figure 1)except the Indoor Garden merchandising department, with net sales accounting for 10.3 percent of HD net sales. Revenue diversification improves HD’s financial stability and reduces its business risk, especially during a worldwide shortage of a particular product.
Figure 1. Net Sales by Merchandising Department (Source: Home Depot’s Annual Report 2021 )
Fast and reliable delivery:
HD has an extensive delivery network consisting of multiple warehouse and distribution centers capable of offering express delivery service that covers over 75 percent of the US population. Home Depot aims to offer express delivery to 90 percent of the US population through investments in additional fulfillment facilities and automation technologies. Fast delivery is crucial to every business nowadays as 62 percent of shoppers claim that delivery speed influences their purchase decisions and 68 percent of consumers claim that fast shipping encourages them to place an order, according to a 2020 Flexe Omnichannel Consumer Survey. Fast delivery will improve HD’s conversion rate and competitiveness in a world where most consumers are expecting same-day delivery.
Competitive pricing model: HD will always have the lowest price in the US due to its Low Price Guarantee for online and in-store purchases. This initiative alone will drive foot traffic to its stores and improve its brand awareness.
Home Depot Weaknesses 2022:
Construction Industry Workforce Shortage:
The US is facing a workforce shortage of 650,000 in 2022 according to Associated Builders and Contractors. 45 percent of HD revenue originates from professional customers, which mainly consists of specialty tradesmen, handymen, general contractors and professional renovators. The record backlog of homes
approved for construction due to labor shortage is likely to undermine HD revenue in the upcoming financial year.
High number of stores:
HD strength is also HD weakness. Most of their stores are big-box format stores with large square footage requiring lots of associates (HD language employees). In the 2021 fiscal year, HD currently has 437 thousand associates in its US locations. HD leases 11 percent of their stores and 95 percent of their warehouses and distribution centers. HD currently forecasted $ 1.005 billion in operating lease payments in FY 2022 and the present value of its operating lease liabilities stands at 6.183 billion. In the event of an economic slowdown, HD still has to pay for the labor expenses and leases of their 2000+ stores across the World.
Low inventory turnover ratio:
In the 2021 fiscal year, HD has $ 22.068 billion in merchandise inventories, with a 10 percent lower inventory turnover ratio than the 2020 fiscal year. A lower inventory turnover ratio indicates weaker sales or/ and overstocking. A low turnover ratio also impacts HD’s profitability.
Home Depot Opportunities 2022:
There is currently an estimated shortage of 3 million homes in the US due to pandemic-related supply chain shortages. Those shortages have increased HD order backlog and deferred revenue to $ 3.596 billion in the 2021 fiscal year. Those backlogs will potentially increase HD net sales if they are converted. Apart from the shortages, population growth is another huge driver of HD sales. The US population growth is expected to grow between 0.7 percent to 0.9 percent every year according to the Census Bureau.
Robust Addressable market:
According to HD’s 1st quarter 2022 earnings transcript, the HD’s home improvement addressable market is 130 million housing units occupied in the US, where homeowners are on a fixed-rate mortgage. Homeowners are spending more on home improvement as the value of their home improves, which will increase HD’s home improvement segment revenue.
Large orders from contractors:
HD CEO, Ted Decker, aims to win large orders from contractors as part of its growth strategy. HD plans to invest $ 1.2 billion in the supply chain, which includes constructing flatbed distribution centers capable of storing and distributing large orders. HD has an average ticket of $ 83.04 in the 2021 fiscal year, and large contractors’ orders that often amount to a couple of thousand dollars will potentially increase HD’s future average ticket.
Home Depot Threat 2022:
The Federal Reserve is projecting multiple interest rate hikes this year. Many economists expect the fed funds rate to be at 2.5 percent to 2.75 percent or higher by the end of 2022, according to a Reuters’ poll. A higher interest rate will reduce the buying capacity of prospective home buyers and reduce the average home prices. Lower home prices also reduce the demand for home building and improvement products. In April 2022, the average number of homes sold dropped 12.4 percent on year on year basis, according to data from Redfin. As a result, HD’s financial performance depends on the housing market’s strength to a very large extent.
HD sources its products from third-party manufacturers across the World, and most of its products are homogeneous in nature. Therefore, its competitors, such as Lowes and Amazon, could source identical products from the same factory and engage in a price war in HD. A price war will hurt HD’s profit margins due to the Low Price Guarantee’s price match policy. Moreover, HD might suffer from a loss in market share if a competitor has the same or lower price as HD’s price match policy has multiple exceptions, such as volume pricing.
Supply chain disruptions:
Home Depot sources a portion of its products from China, and the lockdowns in China have exacerbated global supply chain disruptions. The increase in oil prices due to the Russia-Ukraine war has increased global shipping freight rates. Maersk, a global shipping company, has seen its freight rate increase 71 percent during the first quarter of 2022 on year on year basis. Since HD sources its products globally, its business model is susceptible to oil prices and freight rates. HD can always be passed on those increased rates to consumers, but since wages are fixed in the short run, it will undermine the demand for its products.
In conclusion, HD has its strength and weakness despite being one of the major home improvement retailers in the US. However, the management team should consider multiple opportunities and threats to deliver positive returns to the shareholders. Furthermore, the outlook of HD remains bright as there is a massive demand for housing in the US and supply chain issues are likely to be temporary.